Once an Emerging Producer has a trusted, working script the major roadblock to overcome is financing. The concept of financing has been fraught with Ponzi schemes and false promises since money was first invented. Is it any wonder that there is a general distrust of anyone asking for financing? … Let alone someone with little experience and gaining the trust of investors, studio exec’s, casting directors, completion guarantors, experienced line producers, etc.

The purpose of this article is to help you break down the barriers to financing your film simply by educating you on the terms and processes taken for granted by film industry professional film producers. Watch the short video and you’ll see what I mean.

THE FILM INDUSTRY BUSINESS CYCLE

The best way I know to understand the film industry business cycle is to break it down into the basic functions of the full business cycle. The practical categories used by Producers in their everyday work are:

I recently stumbled across a Filmmaker’s Checklist by Jason Brubaker. I really liked it! Normally, those kinds of lists just annoy me; however, Jason’s list of 65 items all ring true from my 30 years of experience in production. It’s prepared for the small Indie Producer trying to emerge into this very competitive film industry. By all means check it out.

CASHFLOW OF THE PRODUCTION BUDGET

Without taking away from Jason’s excellent list, he missed one vital step – the Cashflow of the Production Budget. This schedule is KEY to arranging financing. Without it the financiers will not know how much is required on a week-to-week basis, making the financing seem like one big blob.

PREDICTION LOWERS THE RISK FOR INVESTORS

Remember, no-prediction = high-risk. Investors want you to show a week-to-week prediction of cashflow requirements FOR EVERY NUMBER IN THE BUDGET. Some of those numbers may be a guess, but it really does give the bonding company, the banks and the financiers a lot of comfort that the Producer is at least attempting to reduce the risk for the investor. See the video clip below.

CASHFLOW OF THE BUDGET WITH ALL KNOWN FUNDING

Another schedule which potential investor’s love to see is a match-up of all budgeted costs with the known funding – sometimes called the “Loan Analysis Schedule”. This is a schedule which matches the budgeted costs with the arrival of any and all funding, whether it be loans on Tax Credits, Equity funding, loans on any Pre-Sales in foreign territories, etc. See this video clip to see what I mean.

FILM PRODUCTION ACCOUNTANT

Yes, this might be the duties of a film production accountant; however, if you are an emerging producer you should have this task as one of your skills when raising financing early in development. Once you have the templates it really is quite easy to master.

Emerging Producers must separate themselves from the crowd as someone who knows the “Business Language” of the investors, Major Studios, Completion Guarantors, Distributors, etc. You can’t be confused with the clutter of people who “have a great idea”, but can’t express their ideas in a business like manner.

The purpose of this article is to help you take a giant step towards your goal as a Producer, and of ultimately financing for your film.

BUSINESS CYCLE

By breaking down the business cycle of film into:

Development (Investor Confidence),

Green Light Stage,

Production Stage,

Post & Audit Stage and

The Waterfall

you will be able to more confidently discuss the film and television production business from a business perspective with potential investors and completion guarantors throughout North America.

ONLINE COURSE

This online course takes about 2 or 3 hours to go through, has 12 videos and a 71 page course content. It also includes a download of a $9Mil professional budget example in pdf format.

John is a working film production accountant who has worked on over 50 film and television productions in 6 countries since 1985. His book, “Walk The Talk”, live workshops and online courses are highly regarded. See http://www.filmaccounting.com for more info.

Most of us in film production have a very strong interest in the process of applying for the various State Film Tax Credits. It is a very real source of financing that can be estimated in the early stages of development, and is a big part of any Indie Producer’s job.

INDIE PRODUCING – PREPARING FOR THE CPA’S TAX CREDIT AUDIT

The Indie Producer can usually find someone to lend the production company up to 85% of the total “Estimated Tax Credit”; however, the lender will hold back at least 25% of the agreed amount (i.e. hold back 25% of the 85% financing) until the final CPA audit has been accepted by the State. The material to audit must be prepared by the film production accountant, with input from the Indie Producer, and presented to the CPA in the format required by the State. This preparation for the final audit is just as much part of producing as is arranging for the initial financing.

IT IS AN AUDIT OF THE COSTS PRESENTED IN THE “COST REPORT”

Effectively, the CPA is auditing the “Cost Report” produced by the production accountant. Additionally, the State may want the costs presented in specified templates, or in a cost report format of their own choosing. Remember that it is not up to the auditor to prepare schedules, or to find material to audit. It is up to the Producer and film accountant to present the appropriate schedules, cost report and original documents for audit. The producer who has not planned for the effort it takes to have the costs presented to the CPA will be over-paying the auditors, loan interest and delaying the final tax credit awards.

A sidebar to this blog is the audit of the Indie Producer’s relationship with the vendors, and of any economic rewards the Indie Producer may have received, even if seemingly legal. This is something that all States are vigilant about, especially Louisiana.

WHAT DOES THE STATE REQUIRE TO SUCCESSFULLY COMPLETE AN AUDIT

(Note: For non-accountants, “AUP” in the picture opposite means “Agreed Upon Procedures” – these are the procedures required to be performed by the CPA before the State will accept the application for the final tax credit). See the video. Each State has its own audit procedures. Some States go so far as to audit the records themselves, without the help of a CPA. I have taken 5 States as a sample and I’ve prepared links to the appropriate schedules required by the State, as well as the audit procedures required. See http://www.talkfilm.biz/statelinks.htm

The web page and the film clip will give both Indie Film Producers and CPA’s an introduction to the process of auditing the film production’s cost report. A vital step in the financing of your Indie film.

In my last article, “Finding Film Financing – Can it be Taught?” I listed several blocks of knowledge which could be taught. Having a workable understanding of such things as Union/Guild Agreements, Film Payroll, Bank Loans, Tax Credits, Production Cost Controls, etc., and how they weave together, will project you as a competent professional.

KNOWING FILM UNION AGREEMENTS ELEVATES YOUR STATUS

Does that mean that a financier will invest in your film project if you know your way around film Guild and Union Agreements (SAG, DGA, IATSE, etc)? Not necessarily. But it does mean that an experienced financier will have more confidence in your decision-making, and will have more confidence in referring you, listening to other strategies more suitable to their portfolio, etc. It definitely gives you an elevated status which the film community will pick up on. That financier might just say, “I’m looking for a young executive like you…” and start negotiating a contract to keep you on full-time.

WORD OF MOUTH IS EVERYTHING IN THE FILM COMMUNITY

The film and television production community prides itself as being much different from the rest of the business world. Word of mouth is everything. Impress one studio executive, or an experienced bond company representative, or a state tax administrator, etc. and believe me you have just made an “in” with their contacts as well. There are so many “wannabe’s” and only a few who will actually go the extra mile to learn the financial building blocks of the business of producing film and television content. Show them you’re in that small group who understand Guild and Union Agreements and their confidence in you rises sharply.

FILM PAYROLL RULES ARE LOCATED WITHIN EVERY “AGREEMENT”

The film unions and guilds have made “Agreements” with the Alliance of Motion Picture and Television Producers, generally known as the AMPTP. The “Agreements” state the rules of the contract between the Guild or Union and the Producer, including all payroll rules.

Each Guild/Union has broken down their rules for calculating payroll into the following 4 categories:

The “Basic Day” and Overtime Rules

The penalties associated with “Rest Violations” (also called “Turnaround”, or “Forced Calls”).

The various circumstances associated with Travel – whether to a “Distant Location” (i.e. staying in a hotel), or traveling outside of a defined “Studio Zone”.

Once you know where these points are in each of the agreements your task becomes one of familiarization and practice.

THE NECESSARY TRAINING AND PRACTICE

I’ve found that a full weekend practicing the feature film payroll rules, followed up by on-line links to all the materials, is plenty for your average person to learn how to manage and to calculate the union/guild payrolls to “gross” (i.e. to the gross amount of pay due before union and government benefits/deductions). I also supply timecard templates (yes, with the formulas) which are “helpers”. Once you have a working understanding of the various Agreements you can fluidly optimize your management of any union/guild within your production.

Over the past few years I have been delivering workshops on Film Accounting to Women In Film and Television to maximum attendance and rave reviews from the attendees. I say this, not to brag (well, maybe a little), but more to emphasize that we covered topics which emerging producers want to know more about.

There were three areas that we covered over 3 days which resonated with all attendees:

1.THE FINANCIAL AND ACCOUNTING CONTROL POINTS

The students drilled utilizing the typical forms and rules used in film production accounting, getting a reality on how they, as producers, can control the costs on their own productions. Students went home with templates and forms, including the typical form flow charts of all basic film accounting processes.

2.A WORKING UNDERSTANDING OF THE FILM BUDGET AND THE “COST REPORT”

The Cost Report issued during any film or television production is the career maker/breaker for any producer. The student is left with an understanding of how to present, read and manipulate the Cost Report, something so important to their career as a producer.

3.A WORKING UNDERSTANDING OF CASHFLOW REPORTS AND FILM TAX CREDIT ESTIMATION

An emerging producer who can prepare a weekly cash-flow schedule from the budget, as well as a reliable estimate of the tax credits expected, is far in advance of other emerging producers in the same pool. Students received cash-flow templates, and various tax credit estimating templates as well.

REAL SITUATIONS

Within these three areas I conveyed as many real situations as I could, throwing in examples of fraud and how to control it, examples of “Back-End” deals and how to sweeten them, examples of bank loan interest and how it works, etc.

FILM ACCOUNTING WORKSHOP 101

My Film Accounting 101 workshop coming up in NYC next month and GA in Jan/15 does not cover the Step 3 above – the curriculum is more designed for those who want to actually work as film accountants. However, the testimonial below from a producer who recently attended reminded me that it is still what many producers want to know about film accounting:

“John Gaskin has an amazing wealth of knowledge that crosses over into various film departments. In his Film Accounting workshop, he outlines the big picture of film financing and production, and then hones in on the detailed accounting procedures. As a producer, the course has given me the confidence to manage larger budgets and communicate with production accountants more thoroughly on different points of financial control. In addition to attending his course, I also read his book “Walk the Talk”, which I’ve recommended to other industry professionals many times. With both formats John breaks down a breadth of complex information in a manner that is clear and digestible.” SR

For anyone who has ever tried to understand how to pay a SAG Performer, take heart. Know that when you look at the full 710 pages of the SAG “Codified Basic Agreement” you really only need to understand 15 to 20 pages of that tome. This is also true to a lesser extent for the Directors Guild of America (DGA), the International Alliance of Theatrical and Stage Employees (IATSE) and the Teamsters working in film.

FILM PAYROLL RULES ARE LOCATED WITHIN EVERY “AGREEMENT”

The film unions and guilds have made “Agreements” with the Alliance of Motion Picture and Television Producers, generally known as the AMPTP. The “Agreements” state the rules of the contract between the Guild or Union and the Producer, including all payroll rules.

Each Guild/Union has broken down their rules into the following 4 categories:

The “Basic Day” and Overtime Rules

The penalties associated with “Rest Violations” (also called “Turnaround”).

The various circumstances associated with Travel – whether to a “Distant Location” (i.e. staying in a hotel), or traveling outside of a defined “Studio Zone” (also often referred to in each locale as “The Circle”).

Once you know where these points are in each of the agreements your task becomes one of familiarization and practice.

THE NECESSARY TRAINING AND PRACTICE

I’ve found that a full weekend practicing the feature film payroll rules, followed up by on-line links to all the materials, is plenty for your average person to learn how to calculate the union/guild payrolls to “gross” (i.e. to the gross amount of pay due before union and government benefits/deductions). I also supply timecard templates (yes, with the formulas) which are “helpers”

SCOPE OF THE US FILM PAYROLL WORKSHOPS:

The solution to understanding Film Guild/Union Payroll is to find a central source of contracts for SAG, DGA and IATSE then summarize the four categories of payroll rules mentioned above. Then have someone show you their version of Excel formulas which comply with these central rules. At the risk of shameless self-promotion, I have done that, one union at a time for each of:

SAG

DGA,

IATSE National Low Budget (any feature or TV production in North America less than $13Mil) and

IATSE Area Standards (any feature or TV production greater than $13Mil outside of the Los Angeles and New York zones).

I have a general Teamster contract for the non-LA/NY areas, but, honestly, it’s child’s play to understand after learning the above.

Actually, it is not a problem for me to say that if you understand SAG, DGA, IATSE Low Budget and IATSE Area Standards payroll rules, you can understand Film/TV payroll anywhere in America – it would only be necessary to get a copy of the local contracts in those higher production centers and you’d be ready in a day or so.

The film and television approved budget reflects what the financiers have given you permission to spend in order to create a product of a specific quality. Throughout the production process the Producer is managing that budget, and the Film Accountant is swiftly comparing the actual costs with that budget on a line-by-line basis. Both of these professionals must be thoroughly familiar with each others duties and responsibilities.

THE PRODUCER MUST MANAGE QUALITY WITH THE $ IN MIND

Above the Line

The best way to really know how to manage a film or television budget is to know how to create one from scratch. But … that is a time-consuming task and really isn’t a requirement to being a good Producer, nor a good Film Accountant for that matter. What’s vital to exist as a Producer? It’s being so familiar with the budget that one can manage any type of cost, within any number of layers, in any film or television budget that you are given. This is not as easy as it looks in a chaotic film shooting environment.

THE FILM ACCOUNTANT MUST BE SURE WHEN MEASURING

By sure I mean certain and stable, especially when measuring the costs against the approved budget – all in relatively unstable conditions. Again the film accountant may never have created a budget from scratch; however, the accountant better be darn sure of where every type of cost is located and in what layer of each budget under his/her control.

CROSSING OVER TO FILM BUDGETING

So the first step is to know the overall format of every film and television budget anywhere that I have worked or seen budgets – USA, Canada, Europe, South Africa and Australia. We use a professional budget in my workshops which you will have a pretty darn good grasp of by the end of any workshop. At the risk of telling you something that you may already know

Budget Topsheet

the breakdown of sections of all film/TV budgets are:

Above the Line

Below the Line Production (also called Shooting Period)

Below the Line Post Production

Other (Insurance, Legal, Interest costs, etc)

CHART OF ACCOUNTS

For you non-accountants the chart of accounts is a listing of all account numbers and account descriptions. I bring it up only because all of the Major Studios and Independent Producers have developed different Charts of Accounts. It’s a bummer, because as soon as you’re very familiar with the account numbers in one budget, another budget will use an entirely different Chart of Accounts.

PRACTICE

The best way to learn thoroughly learn about film budgets and cost controls is to practice in a controlled environment. See my web site for workshops, live webinars and online self-study. Go to http://www.talkfilm.biz

Crowdfunding always seemed like a “wank” to me until I started to look into the new SEC Rulings from July – 2013. (They’re taking effect in mid-Sept – 2013). Really, I had the idea that Crowdfunding was an effort by a bunch of Indie wanna-be’s whining to raise funds without making the effort to understand the Business of Film.

Maybe it was a hope and a wish before, but now it’s about to go open up Indie financing in previously unknown ways.

CROWDFUNDING IS ACTUALLY AN OFFER TO SELL SECURITIES

The Crowdfunding process is actually making “an offer to sell securities”, so it falls into the sacred territory of Hedge Funds. The people who invest will own a few points in your film – the number of points will be proportional to the amount of money invested – this is the same principle as Hedge Funds, and, indeed, is regulated by the same Regulation D of the Securities Act.

THE DIRTY THIRTIES

Many moons ago, right in the middle of the “dirty thirties” following the terrible market crash in October, 1929, the US Securities & Exchange Commission passed a ruling saying that you must register every offer to sell securities. At that time they left a loop-hole – Regulation D – a list of “Rules” for small businesses who couldn’t afford all the red tape involved with this registering process. The Rules are numbered 501 through to 508, so you may see terms like “Reg D, Rule 506”, etc. The rules are meant to be protective of the integrity of non-registered sales of securities and are restrictive.

THE JOBS ACT – SECTION 181, AND NOW RULE 506 (C)

The Jobs Act, which is the legislation behind the Federal Film Tax Incentives (generally referred to as “Section 181”) encourages investment in small business by easing certain securities regulations. As part of the general compliance with the Jobs Act, in July 2013 the SEC passed Rule 506 (c) ) to allow general solicitation and advertising for a private placement offering. However, in a Rule 506(c) private offering all of the purchasers must be accredited investors and the issuer must take reasonable steps to determine that the purchaser is an accredited investor. The SEC legislation can be downloaded by clicking here http://www.sec.gov/rules/proposed/2013/33-9416.pdf

The most interesting to me is #7: “a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year”.

WHAT DOES THAT MEAN TO THE INDIE PRODUCER?

I think an article by Carl Brown in “Slated” on July 19, 2013 says it best:

“ … even if the SEC’s final rules don’t end up inducing millions more private investors overnight into the film industry, they will still spur the need for more diligent background checks, not to mention private placement memos that are grounded in more realistic and informed financial projections. The demand for better film data and verification paperwork will increase, and so too the likelihood that this industry will win acceptance and long-term legitimacy among a wider pool of accredited investors”.

IN SUMMARY

You will see a field of investors opening up which had been blind to us all before; however, it will also raise the bar on the quality of proposals required by the Indie Producer. Yes, the creative idea will still have power, but there will be a very high expectation from “Accredited Investors” that the Indie Producer is competent to handle their money. Your challenge will be to generate that confidence by demonstrating that you understand finance.

The business end of producing and releasing any media project is still overwhelming. The money is tight; investors are careful; the projects that are being “green lit” are under constant risk assessment; those who have done it before are somewhat trusted – those who haven’t are openly distrusted.

Credibility, by that I mean your financial credibility with those who hold the purse strings, was never so sought after – at least not that I’ve seen over the past 30 years.

The missing credibility factor dies off quite fast during the Development Stage. That’s because 50% of development is financial. There are several stages within the development stage which, when ignored, signal an “in-(not)credible” producer.

When was the last time you a saw an Indie Blog talk about Cashflows-Out Matching the Cashflows-In for bank loan purposes, or impressing the Bond Company with your ability to manage the six basic accounting functions during production….

Rhetorical, I know, so I’ll stop.

I have done my bit with this video followed up with 2 hours of videos.